FX – WEEKLY UPDATE :

WEEKLY SYNOPSIS: 26/01/2024

Currency Map:

Brent Crude closed at USD 83.60 VS prior week close of USD 78.75. Gold closed at USD 2018. Nifty closed at 21352 vs prior week close of 21622. 10 Year G-SEC Yield closed at 7.18%.

Major developments: USDINR traded in the 83.06-83.18 range in a truncated trading week and closed at 83.11, gain of 3 ps for USD as compared to prior week close of 83.08. EUR closed flat w/w and GBP climbed 0.08 w/w against Rupee. Indian benchmark Equity index declined 0.98 w/w. 10 Year G-SEC Yield closed at 7.18%. 1-year fwd premia is at 1.87% p.a.

In Jan, FPI’S have sold Rs 36036 Cr of Equities and bought Rs 16951 Cr of debt . In last calendar year, FII’S have net bought Rs 172853 Cr of Equities and have net bought Rs 70489 Cr of debt.

FX reserves stood at USD 616 bn, as on Jan 19 th. Reserves declined by USD 2.93 bn w/w.

Indian merchandise trade deficit decreased to $19.8 billion in December 2023 from $23.14 billion in the same month the previous year. Imports totalled USD USD 58.25 and exports was at USD 38.45 bn. The merchandise trade deficit improved by 11.45% from USD 212.34 billion in April-December 2022 to USD 188.02 billion in April-December 2023. The overall trade deficit improved by 35.87% from USD 108.13 billion in 2022 to USD 69.34 billion in 2023. 

Rupee continues to be range bound and is expected to trade in the 82.80-83.35 range for some more months. There is no clear theme in Global FX markets. However, with US inflation trending down in a sustained manner and with very little signs of negative impact of US tighter monetary policy on US growth and employment, Fed may bring forward rate cuts to second quarter. This may have positive implications for inflows into Indian debt and equity markets and support Rupee.

Hedging advise: Imports be hedged closer to 82.80. Exports be hedged closer to 83.17/83.35.

Global developments: Strong US GDP, robust jobs growth and declining inflation has set a perfect stage for this week’s Fed meeting. Fed could hint at rate cut move in this week’s meeting. Fed’s inflation indicator- Core PCE index is averaging now at 1.9% annualised in last 6 months and is below 2% objective. This could encourage Fed to offer clues for rate cuts. It is surprising that tighter monetary policy has brought a downtrend in inflation without affecting consumer spending and jobs.

US GDP in the fourth quarter expanded at a 3.3% annualized rate, topping expectations for a more run-of-the-mill 2.0% increase. Residential investment notched a second straight increase in a sign housing activity has bottomed, while government spending plowed ahead at a 3.3% clip. Business investment also picked up over the quarter, including a rebound in equipment spending. December orders of durable goods, also released this week, signaled capex growth should continue in the near term. Real consumer spending grew 2.8% annualized in Q4, barely slowing from the third quarter’s impressive 3.1%. The PCE deflator excluding food and energy—the FOMC’s preferred gauge of the recent trend in inflation—rose a rather tame 0.2% in December. Over the past six months, core PCE inflation has risen at a 1.9% annualized pace, a touch lower than the central bank’s target of 2.0%.

ECB reiterated that it “considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution” toward returning inflation to its 2% medium-term target in a timely manner. The ECB also again highlighted a data-dependent approach to conducting monetary policy. On that front, the ECB said the declining trend in underlying inflation has continued and that past interest rate increases continue to be transmitted forcefully into financing conditions.

Bundesbank issued a cautionary message about China’s current economic struggles and their potential impact on Germany. The report notes that China is grappling with “significant economic problems,” and the relationship between China and Western industrial nations has “noticeably deteriorated recently.” Such geopolitical risks, if they materialize, could have severe repercussions for the German economy.

EU PMI Composite rose from 47.6 to 47.9, a 6-month high. UK PMI Composite rose from 52.1 to 52.5, a 7-month high.  Chief Business Economist at S&P Global Market Intelligence, noted that UK business activity growth has “accelerated for a third straight month”. He described this as a “promising start” to the year.

BoJ left monetary policy unchanged as widely expected.

People’s Bank of China (PBoC) announced a reduction in its Reserve Requirement Ratio (RRR) to ease domestic liquidity conditions.

US Fed meeting, BOE MPC meeting, US employment data and ISM(mfrg) are important events for the week.

 Currency technical levels: USDINR: 82.80/82.65 (Supports), 83.18/83.35 (resistance),

EURINR:92(Resistance),90/89.55(Support),

GBPINR: Supports: 104.50/103.40( supports), Resistance:106.50(Resistance).

JPYINR: Resistance:57, Supports: 56 (support).

Hedging advise: USDINR imports be hedged on decline to 82.80. EUR nearby payables be covered.